Entries in Shoreham Tel Co (2)

Sunday
Jan082012

2011 ILEC Deals Few and Far Between: Has the Ship Sailed? 

Will a Little Regulatory Certainty Kick-start this Tepid Market in 2012?

Despite fervent deal activity in most telecom sectors in 2011, ILEC deals were incredibly slim. Sixteen deals were announced in 2010, but JSI Capital Advisors only tracked 6 new deals in 2011—plus one more that didn’t quite make it to the finish line. Although there could be a variety of reasons why ILEC deals were so few and far between in 2011, the single most likely culprit is regulatory uncertainty surrounding USF and ICC. The question is:  did small ILECs miss the boat on a good deal before USF/ICC took a dark turn, or will there be a revitalization of ILEC deals once the fog clears and companies (hopefully) have a somewhat brighter future?

Of the 6 small ILEC deals in 2011, less than half were RLECs buying other RLECs, one involved an RLEC buying a telecom utility, and two involved investment firms on one side or another:

 

2011 was not the first year for a decrease in ILEC deals, but definitely the first year for such a steep decline- JSI Capital Advisors reported 16 deals in 2010, 18 deals in 2009, 19 in 2008 and 20 in 2007 (The Deal Advisor: ILEC Sales Closing in 2010 Approach $10b). Many of you may remember “The Great Dallas Debate” at the 2011 NTCA annual meeting where National Broadband Plan director and Aspen Institute fellow Blair Levin faced off against RLEC duo Randy Houdek (Venture Communications Cooperative) and Delbert Wilson (Hill County Telephone Cooperative). This debate became notorious for a lot of things, but Levin did make one point that even the most dedicated RLEC advocate would have a hard time denying—the “deal” that the rural industry could have gotten with USF/ICC reform a few years ago would have been relatively better than the deal they got in 2011, and the deal we ended up with in 2011 is probably better than the one we would get in the future. Can the same logic be applied to ILEC mergers and acquisitions?

If so, can we expect less than 6 small ILEC deals in 2012? It may depend on how the USF/ICC changes impact the value of these companies. Even though the sheer fact that USF/ICC reform has technically been achieved (assuming the pending appeals cases don’t change anything significantly), it sure doesn’t seem like there is a whole lot of “regulatory certainty”—at least not the level of certainty that could help increase valuations and make RLECs attractive to buyers as they were back in the day. An industry that was once considered safe, profitable and solid as a rock is starting to look like anything but when you factor in the regression analysis-induced “race to the middle,” reduced access revenue, declining landline connections and myriad competitive forces.

A couple of 2011 deals, like La Motte Telephone purchasing Andrew Telephone (both in Iowa) and Otelco acquiring Vermont-based Shoreham Telephone Company were fairly straightforward examples of convenient deals that would boost the buyer’s footprint and create various operating and strategic synergies. Interestingly the Otelco-Shoreham deal reflects the issue mentioned above—that RLECs have possibly missed the boat on a good deal—as Shoreham was reportedly offered three times more from a prospective buyer in 2003 than what Otelco offered in 2011 (The Deal Advisor: Otelco to Acquire Shoreham Telephone for $4.5m).

Also interesting is that the FCC has made no effort to hide its desires that small RLECs merge—consolidated switching is strongly recommended in the ICC section of the Order. The FCC may not have considered that its very own actions on USF/ICC are prohibiting a vibrant market for high-value small rural telephone company deals, but there are more factors to consider than just regulatory uncertainty. The almost-merger between small Minnesota RLECs Farmers Mutual Telephone Company and Federated Telephone Company illustrates this point quite effectively. It was the members of one of the cooperatives who killed a deal that (on paper at least) appeared to be a perfect match (The Deal Advisor: Farmers Mutual Fails to Approve Merger with Federated Tel.).

Is there any optimism for an upswing in ILEC deals in 2012? If prospective buyers are willing to accept the regulatory risks and if ILECs can figure out how to build value in this environment, then it is certainly possible. But will we look back at the 6 deals of 2011 as an unusually low outlier simply because of the year’s heightened regulatory uncertainty, or are single-digit deals the new norm?

Monday
Apr042011

Otelco to Acquire Shoreham Telephone for $4.5m

Otelco Breaks the ILEC Deal Ice Dam

It’s been a while since we’ve seen an RLEC buy an RLEC! But after absorbing the news that Otelco (Nasdaq:OTT) will pay $4.5m for Shoreham, Vermont-based Shoreham Telephone Company, it’s pretty clear why Mike Weaver and the gang stepped up for the western Vermont-based RLEC, not only from an operational point of view but also from a financial point of view:

"The acquisition of Shoreham is a strategically important opportunity for Otelco to continue the expansion of our footprint in New England," said Mike Weaver, president and ceo of Otelco. "While Shoreham has similar roots to Otelco as a rural wireline telephone provider, its existing network in Vermont provides an excellent point from which our CLEC (OTT Communications) can begin serving our fourth state. We are very excited about this transaction and its impact as a catalyst for future growth."

Yes, the CLEC opportunity is compelling, but in my ranking of the reasons behind the deal, the first, second and third would be:  The price! The price! The price! Fourth is the CLEC expansion opportunity throughout Vermont, including Burlington, and even further out into New England.  Fifth: Shoreham fits the RLEC profile that Otelco has targeted from its inception.

Back in 2003 Gary Sugarman, who at the time owned Mid-Maine Communications of Bangor, Maine, tried to acquire Shoreham for a price reported to be roughly three times what Otelco is paying.  The Vermont PUC killed that deal, in part because a PUC staffer argued the price was too high to be supported by Shoreham's earnings.

Somewhat ironically, Otelco acquired Mid-Maine back in 2006, so Weaver is arguably just finishing the quest started by Sugarman years earlier. 

Let’s talk about the price and implied value multiples.  The companies announced that Shoreham generated about $2.4m in revenue last year and served nearly 5,000 access line equivalents.  I assumed a proforma 40% OIBDA margin, which implies about $1m in cash flow; the implied multiples then are 1.9x revenue and 4.7x OIBDA—the 5x cash flow barrier is breached!  However, it’s possible 40% is high…At 30%, the cash flow would be about $700k and the multiple would be 6.3x. The truth probably lies somewhere in between, but no matter how you look at it, the recent dearth of RLEC deals has been broken by one done at relatively low values.  The implications are troubling…

Almost eight years after the original Mid-Maine offer—Shoreham sells to Otelco.  But the price is a fraction of what was rumored to have been offered back in 2003.  Let's face it, the business has changed!  At the end of the day, this feels like an opportunistic buy by Otelco based on the price as well as a begrudging sale by the owners of Shoreham that falls well short of what they might have received a few years back.